Capital Goods - September 2008

The wages of sin taxes

By Scott Mooneyham

Smoke hovered in the hallways in 1999 when farmers from across the state came to Raleigh to have their say on how legislators should use money from the multibillion-dollar national tobacco settlement. Back then, the Legislative Building was still a haven for smokers. Even on the House and Senate floors, lawmakers could light up, and growers scattered through the building did, too. After all, North Carolina was a haven for the industry, producing about a third of the tobacco grown in this country and providing a home for some of the largest cigarette factories in the world.

Now there’s no smoking in the Legislative Building. In fact, a bill passed this year will make people taking smoke breaks stand at least 25 feet from entrances of state buildings. Smoking in state cars? That has been banned, too. Three years ago, the honorables decided that having the nation’s lowest excise tax on cigarettes — a nickel a pack — wasn’t the way to go. They raised it to 35 cents.

You might attribute shifting gears on Tobacco Road to officials getting up to speed with the rest of the nation. But the explanation lies more with economics than ethics. Big Tobacco just isn’t that big anymore. As Tar Heel agriculture became less dependent on growing it, R.J. Reynolds slashed jobs and Phillip Morris packed up to head back to Richmond, Va., the golden leaf lost some political luster. It’s a lesson beer makers and distributors should be reflecting on about now. The beer industry never has had the muscle tobacco once did, but the Miller plant in Eden employs 600. And since the end of Prohibition, local distributors have been significant employers and influential figures in their hometowns.

While lawmakers finally got the gumption to raise taxes on cigarettes, the brewers, distributors and their lobbyists have been able to stave off any hike in the excise tax on beer. In fact, the state rate of 53 cents a gallon hasn’t changed since 1969. But now change in the industry is all the buzz. Forget the rise of craft brewers, it’s mergers and acquisitions among the big boys that could shake things up in North Carolina and across the country. Belgium-based InBev’s $52 billion deal to buy St. Louis-based Anheuser-Busch still has regulatory hurdles to clear, but that deal and last year’s agreement by the makers of Miller and Coors — the former now owned by South African Breweries and the latter by Canada’s Molson — to combine U.S. operations mark unprecedented consolidation in the industry. The question is, will consolidation at the top lead to it below, at breweries and among distributors.

Franchise laws in North Carolina and in other states give distributors the upper hand when it comes to fighting off supplier-imposed consolidation. Laws enacted after the repeal of Prohibition created a three-tier system, with the product moving from manufacturer to distributor to retailer. They barred beer makers from dealing directly with retailers. In North Carolina, once a distributor has the exclusive contract to provide a product in a defined territory, the manufacturer is pretty much married to that agreement. Still, suppliers are suppliers, and according to industry insiders, they have the ability to make life difficult for a distributor that they want gone.

Dean Plunkett, executive director of the North Carolina Beer and Wine Wholesalers Association, doesn’t expect a lot of changes for Tar Heel distributors. He points out that InBev CEO Carlos Brito specifically mentioned Anheuser-Busch’s distribution network in discussing the attraction of the company. “They like the distributor system in the U.S.,” Plunkett says. “It’s worked for 75 years.” Maybe he’s whistling in the dark. Carlos Laboy, an analyst for Credit Suisse, wrote shortly after the deal that InBev traditionally has pushed “massive distributor consolidation” and tried to direct profits away from distributors.

If the InBev deal and the Miller-Coors venture do drive distributor consolidation, it won’t mark a new development. Nationally, the num- ber of beer distributors has dropped from 5,500 to 1,600 since 1995. In North Carolina, there were 160 in the early 1980s. That figure has dwindled to 39 companies operating in 54 distribution areas.

It’s hardly the kind of trend that improves any industry’s political strength. And let’s not forget polls that show so-called sin taxes among the most palatable to the public. Throw it all together, and you could see legislators becoming a bit more receptive to boosting the cost of that bottle of Bud by a few pennies. Plunkett — always quick to point out that the state’s excise tax on beer is among the five highest in the country — says he and the distributors won’t be unprepared. “We’re always expecting some sort of effort.”